Most people are familiar with 529 plans—one of the most popular ways to save for college expenses. Contributions made to 529 plans are made with after-tax dollars, but earnings on contributions grow tax deferred. Withdrawals from a 529 are tax free for qualified expenses.
You can deduct your contributions from your Pennsylvania taxable income up to $15,000 per beneficiary, per year. Married couples can deduct up to $30,000 per beneficiary, per year, provided each spouse has taxable income of at least $15,000.
529 for K‑12
In addition to college savings, the Tax Cuts and Jobs Act of December 2017 now allows up to $10,000 per year from a 529 plan to be used to pay for K‑12 tuition. For those who prefer private K‑12 education, this provides the opportunity for a little tax relief.
Withdrawals from a 529 for qualified expenses are tax free, but the earnings portion of withdrawals for non-qualified expenses are subject to tax and a 10% penalty.
K‑12 qualified expenses are simple and do not allow for much flexibility:
- Up to $10,000 per beneficiary, per year can be withdrawn to pay for tuition.
- Board is not a qualified expense.
- Books, computers, uniforms, and supplies do not qualify.
529 Plans for College
At the college level, it gets a little more complex. Tuition, room and board, fees, books, supplies, and equipment required for courses are all qualified expenses. However, only fees that are mandatory for enrollment are covered. If your student joins a club sports team or theater group that requires a fee but is not mandatory for coursework, this will not be considered a qualified expense. In contrast, a lab fee associated with a chemistry or biology course would qualify.
Essential equipment is another category to consider. If the calculus professor requires a certain type of calculator, or the accounting professor requires a specific software, these would qualify. On the other hand, if your student picks up a copy of J.K. Rowling’s latest novel at the campus bookstore, but it’s not required reading for English 101, the purchase will not qualify.
Room and Board Costs
Room and board can get a little tricky. For students who live on campus and opt for a standard meal plan, there isn’t much to worry about. But not every university or college has ample on-campus housing, and not every student chooses an on-campus lifestyle.
If your student lives off campus, the amount that is qualified cannot exceed the room and board allowance that the college includes in the cost of attendance for federal financial aid purposes. You can usually find this listed on the college’s website, but your best bet is obtaining this figure directly from the Bursar or Office of Financial Aid.
If your student lives off campus but uses the college’s meal plan, the expense qualifies. However, if your student is grocery shopping or dining out, receipts or records will need to be kept and cannot exceed the amount of board the college lists as a cost for attendance. This is something to consider if your student has a penchant for gourmet pizza.
Finally, computers, software, internet access, and peripheral equipment like printers, keyboards, and a mouse are all considered to be qualified expenses for college students. Cell phones, unfortunately, are not.
Other Qualified Expenses
This legislation, enacted on January 1, 2020, now allows apprenticeship costs and student loan repayments as qualified expenses.
If the apprenticeship has been registered and certified with the Secretary of Labor under section 1 of the National Apprenticeship Act, it is a qualified expense under a 529 plan. Fees, textbooks, supplies, and equipment are all considered qualified expenses.
Student Loan Repayments
The SECURE ACT includes a provision that allows monies from a 529 plan to be used to repay student loan debt. There is a lifetime limit of $10,000 for each beneficiary without incurring income taxes or penalties.
In summary, 529 plans can be a good option for both college and K‑12 savings. But to avoid paying taxes or early withdrawal penalties, it’s vitally important to keep up with any changes to the rules.
Originally posted October 2018